Buzz on the Street: Boom Boom Bernanke Live Tonight
A look back at the happenings on Wall Street this week, as seen by Minyanville's Buzz & Banter.
All day and every day, some of the stock market's best and brightest traders and money managers share their ideas, insights, and analysis in real-time on Minyanville's Buzz & Banter. Below are some excerpts from this week's Buzz. Click here for a 14 day free trial.
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Monday, August 20, 2012
The Car Keys Test
Ken Wolff & Shawn Wolff
Looking at the daily charts of most major indices, we are seeing indicators stretched into what would normally be overbought territory, ready for a pullback. Stochastics are overextended; On Balance Volume is hitting a peak, etc. The problem is that this hasn't really been a normal market. June and July were a choppy mess and coincidentally or not, ever since the August 1 software mistake by Knight Capital resulting from a faulty trading algorithm, trading has changed. It feels like a lot of the program trading has pulled out, and the rest of the market is left slightly confused.
The trend is up, but it's not marching boldly -- it's tip-toeing cautiously like Sylvester the cat. Ranges are narrower and the action is often slow and choppy. Volume is low and there's a lack of conviction. So setups which were working before haven't been getting much follow-through.
Someone complained to me Friday that trading has been really tough. My reply was that it's the NOT trading that has been tough. A lot of our time has been spent simply focusing on capital preservation. That is particularly hard when you see a trend and you aren't riding it. Hindsight can be wonderfully cruel. But above all, we have to look for predictability or we are gambling. For a momentum trader, you can't trade unless there is momentum. That includes not only price movement, but also volume and the element of time. So while we are looking for a long overdue pullback, we won't be making a move to enter shorts until we see some confirmation that momentum is re-entering.
I always run my trades through what I call the "Car Keys Test". You know that "aha!" moment when you finally see your misplaced car keys, which you had been searching for far too long? That is what a good trade feels like. If you are pausing, if it feels like a guess or you find yourself using the word "maybe" or "might", then its probably not too predictable. But if you wait until it's so obvious, it feels like you are getting away with something, those "There you are!" trades, almost never go wrong.
Something happened the first night of my bachelor party in Iceland; I awoke Friday with a purple right ankle that was all sorts of painful. Following a few X-Rays, the fine folks at the Reykjavik E.R assured me it wasn't broken, but suffice to say I was scratched from snowmobiling across the glacier and hiking into volcanos.
Some people would have been upset -- this has been 43 years in the making -- but I refused to let it dominate my mood. Instead, I was profoundly grateful that the ankle wasn't busted and I should be able to make it down the 'aisle' on Sunday. As Jamie said when I informed her that I would hop to the Chupah, "Fantastic!"
Some random vibes in no particular order:
I nibbled on some Facebook (FB) under $19, as I mentioned I would last week. There is no magic formula here; the Fibonacci retracement is $19 and I've been eying it for a while. And yes, I do know there is a mountain of supply that came free from the lock-up last Thursday. That's why I've set my stop below $17.
There are a lot of folks whispering that stocks broke out to the upside largely due to the thin summer volumes. That may be true but we would be wise to note that the thin summer volumes will last another two weeks (until after Labor Day).
Past resistance is future support. The S's and N's did a lot of work at S&P 1400 and NDX 2725 respectively, so keep those in the back of your crowded keppes.
I've gotta coupla calls to tend to; as always, I hope this finds you well!
Stop With the "Low Volume" Arguments!
Time and time again, I hear pundits talk about how the rally "isn't real" because it is happening on low volume, yet when challenged, no one seems to have any proof that shows volume has predictive power when it comes to market trends. Volume does not create conviction -- higher prices do. If anything, low volume suggests a certain amount of inefficiency and underreaction in the direction of the prevailing trend. Why? Because volume has a funny way of peaking at significant turning points in markets, and not in the middle. More so than that, though, imagine every single stock reverse split, such that the price of every single stock has now been doubled with no change to market cap. Assuming constant dollars, VOLUME WOULD BE CUT IN HALF. Does that mean anything? Absolutely not.
Market internals continue to look healthy, as my upcoming Lead-Lag Report will show. This trend is real, and everything I look at suggests the move higher can continue for the Summer Surprise. Keep watching the cyclical trade for leadership -- I still maintain that a meaningful move is coming in emerging markets any day now as risk-taking overseas increases, and bulls grow more confident.
Markets opened up and grinded through the SPX 1422 highs -- the high of the day is 1424.
Let's see if we can close above it.
Big move in the banks -- yesterday they showed relative strength and today had follow through.
Metals went early and are stalling a bit
GLD needs to close above 158.15-$158.50 to show some commitment.
SLV above $28.
Tech has mixed action, but overall, lots of participation.
Apple (AAPL) put a high in of $674.88. I think it can use a rest here. Selling some makes sense.
Some are short vs. the high of the day for cute cash flow. I am trimming longs and trying to stay involved.
Potential Key Reversal Day
I am going to bring up the potential for a key reversal day based on how we just behaved at NDX 2802.89, just shy of the 2805 critical level. It's early to talk about it, and maybe foolish, but if NQ (NDX futures) cannot hold on to 2793, it becomes a very real scenario.
Internally, market sell orders at ES 1424.75 were pretty solid, per attached volume ladder chart (bottom numbers are delta, difference between bid/ask (chart is a little bit out there for most, I apologize, but it is relevant). Market orders are when traders want out right away, and this seems to be the case. To be followed, but right now, breadth is starting to bleed and NQ struggling to regain 2793/2794. Below 2788, gap and crap a very likely scenario. Bulls need to defend this rally today.
Click to enlarge
One week ago I pointed out the bottoming pattern that Gold was making, twice testing 1593.50 (basis Dec). The interim reaction has been a $50 rally. One-third of that was this morning.
This is a critical stage. Not for the sizable gain, which isn't very sizable for Gold or for my eventual target. And not for its pace, which has been steep, nonetheless.
Gold is at a critical stage for now, aggressively probing recent highs from below. It is also testing June 29's Pivotal High (the high prior to the actual high), which is natural resistance. And the scapegoat behind today's surge is already known and discounted.
This leg of the rally can continue uninterrupted. A pullback here can be only brief. The ultimate objective is much higher. But where there was little or no potential for any pushback prior to today, and that has changed considerably.
Wednesday, August 22, 2012
S&P Morning View
SPX futures are showing a bit of follow-through weakness after yesterday's Key Reversal and overnight weakness in Europe and Asia. The ES contract is currently trading -3.50 at 1409.
ES day resistance: 1415.25
ES day support: 1405.50 then a big air pocket down into 1398.50
Many leading stocks also printed a Key Reversal day on their daily chart, most notably market-leading Apple (AAPL). AAPL has printed many Key Reversal days before that were not always meaningful. However, with all of the media coverage over the past two days about this company becoming the biggest market-cap company in history, we think yesterday's bearish reversal is significant.
Here is the history since the 2000 market top for Key Reversal days on a 52-week high with commercial traders net short.
Click to enlarge
Corporate Bond Issuance and Greek Rumblings
The last two weeks, we've seen an avalanche of new corporate bond issuance, with more new issuance through the first two weeks ($72-$76b) than the average month of August ($72b). However, this week we've slowed down, with only $4.25 billion in new corporates, according to Bloomberg. One was the JPMorgan (JPM) preferred deal we mentioned on Monday that was upsized from $500m to $1.1b and priced at the bottom end of the range. (bullish)
The calendar is light for today, with only $250 million from Northern Natural Gas ready to be priced.
On the European news front, we're seeing rumblings from Luxembourg PM Juncker (who is also head of the EU) on his visit to Greece, saying that he is "opposed to Greece leaving the Euro area" and that advocates of a Greek euro exit "should shut their mouths" (I swear I didn't make that up). This is quite the backlash from Draghi and other politicians regarding the death of the Euro.
Earlier Greek PM Samaras said that he would "personally guarantee Greek would repay their rescue funds".
FOMC to Talk Again in September, But More QE Likely
From the FOMC minutes from the meeting 3 weeks ago:
"Participants exchanged views on the likely benefits and costs of a new large scale asset purchase program. Many participants expected that such a program could provide additional support for the economic recovery both by putting downward pressure on longer term interest rates and by contributing to easier financial conditions more broadly." "However, others questioned the possible efficacy of such a program under present circumstances, and a couple suggested that the effects on economic activity might be transitory."
Also, some members were worried about the markets for Treasuries and MBS if the Fed did more while others were not. On an exit one day, "several worried that additional purchases might alter the process of normalizing the Fed's balance sheet when the time came to begin removing accommodation." A few were worried about the risks to financial stability and inflation with extended accommodation or more QE. Lastly of importance, "many" wanted any new QE to be "flexible to allow adjustments, as needed, in response to economic developments or to changes in their assessment of the efficacy and costs of the program."
Bottom line, of the 10 voting FOMC members, 8 are doves so it will always be the case that "many" are ready for more QE if need be. The hawks are few and far between. I stick to my belief that more QE is coming on Sept 13 as the October meeting is too close to the election and Bernanke won't act in December if Romney wins. This could be his last chance for a while and Ben still seems to believe in the pixie dust of QE.
Thursday, August 23, 2012
Metals Throw an Overnight Curveball
Ah, even when you're on, it's always tricky. After nine months of watching major resistance hold and hold again, I figured selling in front of 1660 Gold and 30 Silver was a good move. Both metals were extended on the Fed minutes, which only confirmed what everyone has known for the past 6 months, that the central bank stands ready to act. Seeing the NY session end just shy of both targets made me further think the targets were justified, and I expected a few more fits and starts before pushing through. Not to be.
The Japanese session pushed the metals right through those barriers with ease and I found myself up at wee hours of the night scrambling to cover my small short and reestablish my long as I said I would be doing. My trades were sloppy to say the least, but I was able to work myself back into the gold and have been chasing the silver, sleeping on retreats, and staring at my screen during strength. Unlucky.
To think I had a massive position yesterday, BEFORE the breakout. Such is trading...
Anyhow, I am trying to be professional about this. It has been a good month so far and I will fight tooth and nail to build my metals longs up over the next few sessions. Obviously there is risk here, but the charts do show now a meaningful break of the major downtrend line capping action for over a year. This technical action has preceded the major moves both metals have enjoyed in the past. We know the season is right. Almost on cue, both metals began to rise around August 15th. Look at a 10-year chart and you'll be amazed. Yes, there are definite positives here. The strategy then becomes a function of how risk averse one is.
For me, I will be buying on down moves here. I have bids in at 30.15, 30.06 and 29.80ish for silver. For gold, I am in around 1657-1662. I know I am going to have to likely lose some money first. Even those bids are "up there" when you consider how far and fast we've come over the past week. For me, I am putting my faith, (and money), in the fact that this downtrend line has been finally breached. Always remember that diagonal lines rule the metals markets.
Gold in Draghi?
If yesterday's FOMC minutes gave the bulls hope that the Boom Booms helicopter blades would shear the tall grass the bears could be hiding in around Jackson Hole, only to have the Fed's Bullard throw cold water on the premise this morning, then why are the metals still screaming?
Could the answer be Draghi?
Click to enlarge
FCX Possible Bellwether of New QE Up-Leg
I am not sure what to make of Freeport-McMoRan Copper & Gold Inc. (FCX). On the one hand, it has climbed 19% off of its July low. On the other hand, its larger pattern resembles a huge 3-year topping formation.
So here we have a copper and gold producer that could be seeing relief in the form of a lower dollar, rising precious and industrial metals prices, and the prospect of more, possibly very aggressive QE. Yet the technical and pattern set-ups argue against a climb beyond 40.00.
If FCX more or less follows my script, then what might it be saying about "the world"? Perhaps that more QE from the US, Europe, China, and Japan will not prove efficacious, and, instead, the huge 3-year top pattern is WARNING us that global aggregate demand is beyond monetary repair, and a "natural" process of creative destruction, finally, will have to take place before the global economy begins to recover in earnest.
Let's keep an eye on the behavior of FCX in the upcoming days for signs that it is, or is not, a bellwhether of a new QE upleg, or its opposite number -- the failure of more QE.
Click to enlarge
Friday, August 24, 2012
Looking For Risk-On?
FYI -- crude oil is reversing higher, likely off the durable goods number.
If Apple (AAPL) and the EUR/USD, which are a teeny, tiny bit off their respective lows, follow through, we could see an upside whiplash.
Once again, it 'feels' to me like the market's teetering on the brink -- which is what usually happens before rallies.
Good luck out there!
The Jawbone's Connected to the Tailbone
God may not play dice with the universe, but does Boom Boom use a magnet on the roulette wheel formerly known as the free market?
Whether doubling down on beta or splitting alpha 8's, the cards feel marked and the game rigged in Algoville and Fedtown.
The drinks are free but there are no clocks on the walls as QE gets discounted every time snake eyes are rolled.
But, the ultimate house may be Mother Nature's domain and what happens in Vegas, doesn't stay in Vegas, does it Harry?
T Report: The Intellectual Dishonesty of Being Long Stocks
I have trouble making a strong case for stocks. I can find some very convincing reasons of why credit can perform well, especially CDS, but it is difficult to find many reasons to like stocks here, yet I do. Apple (AAPL) has its own special little place of pride as I now want to short it as I think it is overvalued, but am scared to touch it.
It is a weird predicament I'm in right now. I could write pages on why stocks should be lower, but in the end, I think they are headed higher, and it is almost exclusively due to central bankers.
I think the ECB needs to do something. I actually would agree with a plan that in the short term provides cheap financing for the weaker countries, so long as it is accompanied by actions that should restore balance over time. I think they should do it, and even more importantly, if they don't do something the consequences will be bad. I see no way to avoid a severe global recession if the ECB doesn't act, so I think they will.
I don't see the need for the Fed to act, but with data coming in weaker again, the market is starting to rely on QE again here. I don't think the Fed should do another round of QE, but what I think doesn't really matter. I'm not sure it will do much for the economy, or that it will do much for stocks at these elevated levels, but it would do something.
So basically I'm long because the central bankers seem set to act and it isn't fully priced in. In fact, the market still strikes me as being too bearish. Far too many people are pointing out things like VIX and volumes as sign of imminent collapse, that I don't think we see that sell-off. I still have some September puts as the risk of a sell-off isn't negligible, but I think we have one more push higher, especially as some bears got sucked into shorting in the past two days.
I still think CDS offers good value, and am looking for IG18 to go to 95 for a variety of reasons. I take some pride in that analysis. Being long stocks here seems a bit shameful and leaves a bad taste, but in the end I still think that is the right call for now.
Have a great weekend.
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